Liam Dann: Reserve Bank well placed for Brexit fallout

Graeme Wheeler has kept his powder dry. Photo / Mark Mitchell

At a meeting in Zurich on Saturday central bank governors from around the world pledged to support financial markets to avoid Brexit contagion damaging global growth.

It was a reassuring statement. The really good news for New Zealand is that our Reserve Bank is among the best placed in the world to deal with the downturn risk.

Even at a record low of 2.25 per cent our rates are among the highest in the developed world. We have plenty of capacity to cut as required.

In the mix of red numbers that dotted global stockmarket tables after Brexit one thing was clear. If your interest rates were already at zero, or lower, the fallout was worse. Italy, Spain, Germany, France and Japan's Nikkei and Topix slumped the hardest.

One thing the European Central Bank and Bank of Japan have in common is negative interest rates.

By comparison, even the UK's FTSE index was only down 3.15 per cent.

The difference is the level of confidence investors have in the central bank's ability to respond.

The FTSE rallied in afternoon trading after Bank of England governor Mark Carney said the central bank was ready to inject up to 250 billion ($480 billion) to keep markets functioning.

In the US the major indices were also down between 3 and 4 per cent, though Wall Street may take more of a battering in the coming days.

The Federal Reserve will be able to offer some calming influence largely because it's expected next move was a rate hike.

A clear statement that it will hold for longer - or reverse if things got really bad - would have enormous weight.

But it's worth remembering both US and UK rates are still just 0.5 per cent.

New Zealand by comparison is in an excellent position from a monetary policy point of view.

This is why governor Graeme Wheeler and his team have kept their powder dry through several decisions when a range of legitimate arguments were being made to cut more aggressively.

It is true that we have skated perilously close to deflation territory but, as oil rebounds one suspects, we may have gotten away with it for now. So from here rate cuts are now more likely.

One more looks like a certainty. A second looks more plausible, depending on the severity of the global Brexit fallout.

Some economists already had two cuts pencilled in as an outside chance. If the world really goes to hell in a handbasket this week they may start talking about a third. But the beauty is, we have the capacity for it.

Despite the added global risk that Brexit brings, our dollar is still close to US70c. It has traded as low as US63c this year. That's a global vote of confidence in our economy.

Immigration, so central to the Brexit debate, is a key component of our strong position.

Put simply, the economic reality is that New Zealand right now is a place where a large number of people would love to come and live. That is challenging on many levels, not least housing supply, but it is also valuable.

We have to make some big and careful calls about immigration in the next few years. It is not something we should panic about.

New data last week showed that this cycle may have already peaked - although the dips have been slight. While we still have record inflows, on an annualised basis, net gains have fallen for the past four months.

It's also worth remembering that the biggest influence on the numbers is the trend in and out of Australia.

A sluggish economy and draconian rules that allow authorities there to lock up any Kiwis they don't like the look of seems to have dampened the Lucky Country's appeal for now.

But there is a balance to be struck on the pace of immigration. As we have seen in the UK, change that happens too fast to carry the majority of the population with it is dangerous.

The Brexit vote has been marred by ugly and divisive politics. And we really don't want to go there.